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FCC Mulls Regulation of Service Bundles


By Kyle Dixon
June 29, 2005

The Supreme Court's decision Monday sparing cable modem providers and consumers costly regulation is very good news. But broadband and other network owners are still not out of the woods. A pending Federal Communications Commission inquiry suggests that they must also dodge the threat that they could be regulated to the extent they offer "bundles" of service, such as video, voice and broadband Internet access services.

Antitrust law generally allows "tying." Absent certain stylized circumstances, a company is free to "tie" products together. Thus, a company can encourage consumers to buy Product A (e.g., film) for the privilege of also buying Product B (e.g., a camera). The antitrust concern with tying only arises when the company has "market power" that allows it to "tie" the purchase of one product to purchase of the other. In this example, this would mean the company's camera is uncommon and so desirable that consumers will buy film just to get it. If consumers are willing to buy another camera or do without, they are free from the economic coercion antitrust law seeks to eliminate. Consumers are also protected to the extent a company merely offers them a discount if they buy two products as a "bundle," rather than buying them separately.

The trend of the hour in communications markets is "bundling" - taking a variety of products (voice, video, Internet and wireless) together and marketing them to consumers in a single package. But good, consumer-beneficial bundling can also be characterized as the more antitrust-suspicious "tying."

In a broad and potentially far-reaching inquiry, the FCC has sought comment on whether to regulate bundling generally, not solely when there is market power. The breadth of the inquiry - and its failure to distinguish the very specific and narrow circumstances when tying is problematic - raises concerns that go beyond the context of just telephone companies.

The broad language of the agency's questions sweeps in other broadband providers such as cable operators, prompting at least one operator to file comments. The agency's request for comment cites the cable modem proceeding, which has been on hold during the Brand X litigation. The FCC also has recognized repeatedly that cable modem and other broadband providers compete with DSL and similar telephone company offerings. This fact and cable's sizeable lead in signing up broadband customers make it unlikely that the FCC will regulate telephone company bundles separately or more intrusively than those of other broadband providers. Indeed, the acknowledged competition among broadband networks suggests that, if the FCC decides to regulate bundles involving broadband, such regulation may include packages offered by DBS companies in partnership with DSL or other broadband providers, as well as cable providers.

Even more troubling, the FCC's inquiry appears to encompass bundles that don't include broadband, such as those involving video service. This could include cable and satellite companies' practice of bundling several video channels together, rather than offering channels (as many legislators and consumer advocates demand) on an "a la carte" basis. Certainly, the FCC could exclude this issue as the bundling inquiry matures. Only months ago the FCC found that requiring channels to be offered a la carte could reduce the supply and diversity of programming. Nonetheless, if the FCC decides to regulate bundles involving broadband, it would find it difficult to avoid applying the same justification to bundles involving video, especially given the competition in both broadband and video markets.

It is still too early to know whether the FCC will steer clear of these problems by terminating the bundling proceeding or narrowing it to "tying" or other realistic threats to competition. The agency's March opinion did not propose specific rules governing service bundles.

Still, the issue of when companies should be allowed to bundle services is relevant to several proceedings that are at the rulemaking stage, including those that will decide the regulatory frameworks for various broadband services and voice over Internet Protocol. Given these open dockets, the anticipated appointment of at least two new FCC commissioners and political pressures that may erupt as Congress contemplates statutory reform, regulation of service bundles has an uncertain future.

Thus, while cable and satellite companies should refrain from fearing the sky is about to fall, they should keep watch for brewing storms.

Kyle Dixon is Senior Fellow and Director of the Federal Institute for Regulatory Law and Economics at The Progress & Freedom Foundation.

Reprinted with permission.



The Progress & Freedom Foundation